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Missed Expectations: The Argentine Convertibility

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  • Sebastian Galiani

    ()

  • Daniel Heymann
  • Mariano Tommasi

Abstract

This paper studies the process that led to the Argentine crisis. The crisis is understood as a major disappointment of previous expectations, indicated by widespread insolvencies and abrupt declines in consumption. The analysis concentrates on the sequence of public and private decisions, and the varying perceptions and policy incentives that motivated them. In the nineties Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past. The government was motivated to reinforce those expectations, for signaling and political economy reasons. The convertibility monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary measures, the reliance on the sustainability of the real exchange rate increased over time. In the late nineties exports stopped rising and the foreign supply of credit tightened. Facing these contraints, the economy contracted and the solvency of the government was put into question. The financial system was vulnerable both in the event of devaluation and that of a (large) deflation-cum-adjustment. As was implicit in its design and management, convertibility proved to have very large exit costs.

Suggested Citation

  • Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2002. "Missed Expectations: The Argentine Convertibility," William Davidson Institute Working Papers Series 515, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2002-515
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    References listed on IDEAS

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    1. Pablo T. Spiller, 2003. "The Institutional Foundations of Public Policy: A Transactions Approach with Application to Argentina," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 281-306, October.
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    5. Guidotti, Pablo E & Vegh, Carlos A, 1999. "Losing Credibility: The Stabilization Blues," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 23-51, February.
    6. Guillermo Calvo & Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 91/77, International Monetary Fund.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    8. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications (Working Papers) 1909, Inter-American Development Bank.
    9. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
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    Cited by:

    1. Martín Guzmán & Martín Fiszbein, 2011. "Un Marco para el Análisis de los Procesos Macroeconómicos en la obra de Prebisch," Department of Economics, Working Papers 084, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    2. Marcos A. Buscaglia, 2003. "The Political-Economy of Argentina???s Debacle," William Davidson Institute Working Papers Series 2003-594, William Davidson Institute at the University of Michigan.
    3. Jean-Charles Rochet, 2006. "Optimal Sovereign Debt: An Analytical Approach," Research Department Publications 4477, Inter-American Development Bank, Research Department.
    4. mercado, p. ruben, 2007. "The argentine recovery: some features and challenges," MPRA Paper 58612, University Library of Munich, Germany.
    5. Vlad Ivanenko, 2003. "Nonmonetary Trade and Differential Access to Credit in the Russian Transition," Problems of Economic Transition, Taylor & Francis Journals, vol. 45(12), pages 6-57.
    6. Martín Guzman & Pablo Gluzmann, 2012. "Tensions in the Implementation of Central Banks’ Policies in the Pursuit of Economic Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(65-66), pages 173-205, September.
    7. Osvaldo Schenone, 2003. "Déficit y Convertibilidad en Argentina 1991-2001: Inconsistencia Asimétrica," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 768-773.
    8. Jeannette Jackson & Maria Coolican, 2002. "Healthy Organizations and the Link to Peaceful Societies: Strategies for Implementing Organizational Change," William Davidson Institute Working Papers Series 536, William Davidson Institute at the University of Michigan.
    9. García-Fronti, Javier & Miller, Marcus & Zhang, Lei, 2005. "Credit Crunch and Keynesian Contraction: Argentina in Crisis," CEPR Discussion Papers 4889, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Economic Crisis; Contracts; Convertibility and Wealth Perceptions;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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